Thursday, June 14, 2007

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A pop quiz for Senators Baucus, Graham, Grassley, and Schumer

The Financial Times' Eoin Callan, Krishna Guha, and Richard McGregor report on a bipartisan effort to introduce a bill aimed at punishing China for currency manipulation:

China came under increased pressure to revalue its currency on Wednesday as a bipartisan group of US senators introduced legislation designed to push the Bush administration towards a full-blown trade dispute with Beijing.

The bill would send exchange rate disputes to the World Trade Organisation by treating them as unfair export subsidies and includes a range of sanctions. The move will increase pressure on the White House to toughen its stance on Beijing.

Lawmakers say China’s fixed exchange rate subsidises its exports and has contributed to a record annual bilateral US trade deficit of $233bn (£118bn)....

The legislation has gathered momentum in the Senate and would allow US companies to appeal for anti-dumping duties on Chinese goods based on the distorted value of the currency.

The bill was introduced by Max Baucus, chairman of the Senate finance committee, and co-sponsored by Charles Grassley, ranking Republican on the committee. It is also backed by Charles Schumer and Lindsey Graham, who previously proposed a unilateral 27.5 per cent US tariff on Chinese goods that would have violated WTO rules. A tougher version of the bill is being prepared by a bipartisan group in the House of Representatives.

Mr Schumer said: “This breakthrough proposal is like nothing else because it’s tough, wide-reaching and WTO-compliant. The previous legislation got China’s attention; the purpose of this legislation is to force change.”

David Christy, a lawyer at Miller and Chevalier, said any attempt by the US to apply anti-dumping duties against Chinese goods based on the value of the country’s currency could fall foul of WTO rules.

The US Treasury, meanwhile, again shied away from branding Beijing a currency manipulator in its semi-annual currency report to Congress.

Meanwhile, Chris Nelson reports on how hearings on the Korea-U.S. Free Trade Agreement went earlier this week. Nelson is usually respectful in his language, so this passage is particularly telling:
Deputy USTR Karan Bhatia and [Assistant Secretary of State] Chris Hill spent the morning being whipped, insulted, and generally abused, on a bipartisan basis, by the House Foreign Affairs' subcommittee on trade and terrorism - an interesting combination of jurisdictions.

If this trend continues, and if the Administration cannot organize a fact-based presentation which manages to offset the emotional, fundamentally fact-bereft bombs being thrown, KORUS is a dead letter....

The Members came armed to the teeth with attack questions prepared by the Auto Caucus, and Chairman Brad Sherman let them make their opening statements unedited for the first 47 minutes.

Bhatia and Hill were then given 5 minutes - timed to the milisecond - to summarize their testimonies. So absurdly out of balance was the process that Sherman actually banged his gavel to interrupt Bhatia's testimony as it sought to answer the key auto questions already thrown at him.

Hill had on the table with him a copy of the book "The Power of Faith and Fantasy", and one suspects it took all his diplomatic gravitas to refrain from flinging it at Manzullo, when he was bitterly insulted for the sin of helping Chrysler organize a display of certain products on his embassy residence's lawn, while serving as US Ambassador in Seoul....

The impassioned speeches also offered brilliant insights such that the Administration's claims for good jobs being created by FTA's could not possibly be true, because when you have a trade deficit, that means there has to be a big job loss.

We're not making this up. In fact, on one level, this hearing was an insult to the intelligence of Congres.

However, on the political level, this hearing was serious as a heart-attack, as it shows that until or unless the US business interests which would benefit from KORUS get organized and step foward - services, banking and investments, etc. - that the Auto Caucus can win by bullying and the Big Lie.

And in fairness to the Members who unwittingly embarrassed themselves this morning, they are at least honestly reflecting the pervasive angst over globalization which political America is wrestling with these days.

Clearly, Congress is upset about U.S. trade policy. And when congressmen are upset, stupid policies usally follow.

Here's a multiple-choice question to the proposers of the new China bill:

The American economy is experiencing rising interest rates and worries about rising inflation. Neither of these trends bodes well for average Americans.

What's the best way for Congress to exacerbate this trend?

A) Subpoenaing White House aides.

B) Getting mired down over earmark reform.

C) Fret about Congress' low standing in public opinion.

D) Raise the price and increase uncertainty of import flows?

I'm sure Chuck Schumer, eminent economist, will figure out the correct answer.

Meanwhile, James Pethokoukis worries that Congress is partying like it's 1929.

posted by Dan on 06.14.07 at 08:54 AM


I'm working in Michigan today, which is in the 6th year of a one year recession.

This is not just about statistics and sarcasm, real people are being hurt, with the exception of tenured professors.

Unless something changes there will be a significant populist backlash, and then the "freer trade" agenda will be in real trouble.

posted by: save_the_rustbelt on 06.14.07 at 08:54 AM [permalink]

I'm sorry, but is there ANY economic problem in Michigan that the people of that state have not brought upon themselves? Dopey management and unions of car companies and dopey government have made things pretty bad. To suggest that limiting free trade, which will make goods more expensive for people whose leaders have bankrupted them, is just, well, dopey.

posted by: John on 06.14.07 at 08:54 AM [permalink]

"The American economy is experiencing rising interest rates and worries about rising inflation."

Give me a break.

I don't know how we ever got through the mighty collapse of the economy that occurred the last time we experienced interest rates are rising to these levels, which was... last summer.

And inflation, while slightly above the Fed's target, is benign.

I don't know why Daniel always is predicting that things are about to be really bad for our economy. Remember 3 years ago when Drezner was so worried that the dollar was going to crash? Didn't happen.

Drezner seems like one of those economists who are predict ten of the last 5 recessions. The sky isn't falling now. And it won't even fall if this asinine China legislation is passed.

posted by: Al on 06.14.07 at 08:54 AM [permalink]

I'd just as soon the question of whether to ratify a trade agreement with a longtime American ally not be conflated with the issue of how to respond to Chinese manipulation of the yuan. These are separate questions, however much they may involve similar feelings on the part of some people.

posted by: Zathras on 06.14.07 at 08:54 AM [permalink]

Better trolls please.

Yes, unions have their share of the blame. But car companies have a lot. How many millions did Mullaly get for a few months work last year? Not only that, but if the Big Three are to survive, there will be big changes to the health care system in this country.

posted by: Joe Klein's conscience on 06.14.07 at 08:54 AM [permalink]

Until 2006, I believe, most of the manufacturing jobs lost in Michigan (and the rest of the rustbelt) were not with the Big 3, many were not auto related at all.

But that is ok, because NAFTA was supposed to create a flood of new high value jobs. Remember?

Protectionism isn't the answer.

Having the Treasury Secretary licking the boots of the Chinese isn't the answer either.

Having John Snow run a car company will be a disaster.

But at least Bob Rubin gets a good bonus.

And Krugman is finally eating just a little bit of crow.

posted by: save_the_rustbelt on 06.14.07 at 08:54 AM [permalink]

Drezner your knee jerks are showing. Stephen Jen has some comments on the proposed senate legislation which is more serious, and genuinely interesting.

"The US Senate Finance Committee’s proposed bill is not bad. In the bill put forward on Wednesday by Senators Baucus, Grassley, Schumer and Graham, it was proposed that, if currency misalignments resulting from distorted policies (the ‘malign’ type of currency misalignments) are not resolved after 360 days, the US Treasury, in consultation with the Fed, could consider outright currency intervention. We have these thoughts:

First, this bill is not nearly as protectionist as it could have been, as it does not contain automatic triggers for countervailing duties.

Second, it does not mandate but only allows the Treasury to decide on outright currency intervention. Assuming that the US Treasury tries to do things in the best economic, not political, interest of the US, it would not hastily conduct interventions.

Third, one way we judge to see if a policy is ‘good’ is to ask what the economic impact would be if other countries were to adopt the same policy. We believe that this particular bill is sensible enough that if Euroland and Asia were also to adopt this bill, the net impact on the global economy would not necessarily be negative.

Fourth, in practice, however, there would be operational issues, particularly regarding emerging market currencies such as the CNY. If the US Treasury were to decide to intervene to sell dollars and buy CNY, it would be difficult for it to implement this trade without the consent of Beijing.

Fifth, this bill presumes that the JPY misalignment is considered ‘benign’, while the CNY misalignment is considered ‘malign’. Under this bill, no action can be taken regarding the JPY.


posted by: dissent on 06.14.07 at 08:54 AM [permalink]

When argentina had too much of in imbalance between imports and exports, we had a solution for them. Import less and export more.

That has been our solution for everybody who gets in this spot, except us.

The chinese are keeping us from following this solution. When we devalue our currency it makes our stuff cheaper and other people's stuff more expensive, and so we can export more and import less. But the chinese then devalue their currency just as much. If we couldn't compete with them on price before we devalued, why could we compete with them after both are devalued?

In a way this is good for us. The chinese give us stuff cheap. We'll never really have to pay for it because at some point the chinese *will* revalue their money and let ours keep depreciating, which will wipe out a lot of our debt.

If you think this is a good thing for us in the long run, I have a bridge in Brooklyn you can have a long-term lease on....

This economic analysis is something that lots of people can understand without even Econ 101. Is there sophisticated economic analysis that happens to be correct that invalidates it?

posted by: J Thomas on 06.14.07 at 08:54 AM [permalink]

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